Goldman Sachs Said to Have Been Warned of SEC Suit

By Joshua Gallu and David Scheer -
Apr 16, 2010

Goldman Sachs Group Inc., which
fell 13 percent yesterday after U.S. regulators announced fraud
accusations, didn’t disclose that it was warned nine months ago
that investigators wanted to bring a case, people with direct
knowledge of the talks said.

Goldman Sachs responded to the so-called Wells notice from
the Securities and Exchange Commission within months and met
with the agency officials trying to fend off the civil lawsuit,
said the people, who declined to be identified because the talks
weren’t public. In March, the New York-based firm said it was
cooperating with regulators’ “requests for information.”

“The question is whether a general disclaimer like that is
rendered misleading because you left out the specifics,” said
Adam Pritchard, a former SEC attorney who teaches law at the University of Michigan in Ann Arbor. “The prudent, conservative
choice is to disclose more,” because omissions can lead to
shareholder lawsuits, Pritchard said.

Lucas van Praag, a spokesman for Goldman Sachs in New York,
declined to comment.

Goldman Sachs, the most profitable company in Wall Street
history, created and sold collateralized debt obligations tied
to subprime mortgages in 2007 without disclosing that hedge fund
Paulson & Co. helped pick underlying securities and bet against
the vehicles, the SEC said in its suit. The SEC sent the firm a
Wells notice in July and the company responded in September, one
of the people said.

Companies typically disclose legal issues such as regulatory
probes in their quarterly and annual financial reports.

Annual Report

Goldman Sachs’s annual report for 2009, filed with the SEC
in March, recycled a passage the company used in the previous
year’s report to describe regulatory probes involving securities
linked to subprime mortgages. In both cases, the firm wrote:

“GS&Co. and certain of its affiliates, together with other
financial services firms, have received requests for information
from various governmental agencies and self-regulatory
organizations relating to subprime mortgages, and
securitizations, collateralized debt obligations and synthetic
products related to subprime mortgages. GS&Co. and its
affiliates are cooperating with the requests.”

Goldman Sachs, which fell $23.57 to $160.70 in New York
trading yesterday, might argue that it reasonably believed the
SEC’s warning wasn’t material, Pritchard said. The firm could
argue that it thought the regulator wouldn’t sue after Goldman
Sachs presented its defenses, he said.

“The SEC’s charges are completely unfounded in law and fact
and we will vigorously contest them and defend the firm and its
reputation,” Goldman Sachs said in a statement yesterday.

To contact the reporters on this story:
Joshua Gallu in Washington at
jgallu@bloomberg.net;
David Scheer in New York at
dscheer@bloomberg.net.
To contact the editor responsible for this story:
Alec McCabe at
amccabe@bloomberg.net